Though it is generally believed that increasing competition improves social welfare, we are able to show with a Shubik-Levitan demand function for differentiated goods that this is not always the case. Under Cournot and Bertrand competition, market entry increases the equilibrium total output and lowers the equilibrium price in the case of substitutes, but it reduces the total output and raises the price in the case of complements. In the long run, the equilibrium number of firms is excessive and the equilibrium cannot achieve even the second-best social welfare under either type of competition, regardless of product substitutability or complementarity.
We revisit Pal (1998) and Matsushima (2001a), which present different equilibrium locations respectively. We consider nonlinear transport costs and show that Pal's result (dispersion) is more robust than Matsushima's (partial agglomeration). Pal's result holds true for any transport cost function, while Matsushima's does not hold true under strong concavity or convexity of the transport cost function. If we consider sequential move of location, Pal's result holds for any transport costs. On the other hand, Matsushima's does not hold except for the linear transport costs. We also discuss welfare and show that non-linearity of the transport cost function yields rich welfare implications.
We consider the effects of free entry on the market structure and social welfare of an asymmetric Cournot oligopoly. Even if we allow for the existence of different types of firms initially, only one type (in almost all cases) can survive in the long run. Free entry leads an economy to a symmetric equilibrium, in which the excess entry theorem holds. Further, we consider the socially optimal policy for this economy. In cases of either (i) a concave demand (which implies strategic substitutability) or (ii) strategic complementarity (which implies a convex demand), the type of firms that should remain in the market to achieve social optimality does not necessarily coincide with the type of firms that will survive in the long run. The market may select not only the wrong number of firms but also the wrong type of firms in the long run.
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